CF LAB

Weighted average cost of capital

WACC

For learning purposes only. Do not use this calculator or its data to make investment decisions. Results are simplified teaching examples, and company figures may be incomplete or out of date.

What is this?

Companies raise money from two sources: shareholders (equity) and lenders (debt). Both expect a return. The weighted average cost of capital (WACC) blends those two costs into one number, weighted by how much of each the company uses. It is the minimum return a project with the same risk as the company should earn: projects above WACC add value, projects below it destroy value.

Start with the made-up example, or pick a real PSX company to fill in its costs and funding mix from its latest accounts and share price.

How to read the chart

  • Each block’s width is its share of funding; its height is its yearly cost.
  • The blue line (WACC) is the average height of the two blocks.
  • The striped part of the debt block is the tax saving on interest.
  • The orange dashed line is the project’s return. Above WACC = accept, below = reject.
Chart ↓
WACC
14.49%
The company’s blended cost of money per year: the hurdle a new investment of similar risk should clear.
Debt after tax
9.23%
Funding mix E / D
60 / 40
Project vs WACC
+1.51 pts
Accept
What this means

Try this
How it’s calculated
About the data: sources and method

  • Accounts: total debt, interest, pre-tax profit, income tax and shares outstanding come from each company’s stockanalysis.com statistics page, for the latest 12 months (dates above). Interest = EBIT ÷ interest cover.
  • Market value of shares: shares outstanding × the latest PSX closing price (updated every Saturday). Debt is taken at its value in the accounts.
  • Beta: 5 years of monthly returns against the KSE-100 Price Return index, the Beta calculator’s default, with months containing a bonus issue, split or unusually large dividend left out.
  • Cost of debt = interest ÷ debt: the average rate on existing borrowing. When debt is under 2% of funding, or this rate is outside 3–30%, it isn’t meaningful, and the example 13% is used instead.
  • Tax rate = income tax ÷ pre-tax profit: the effective rate, which includes super tax and one-off items.
  • Not data: the risk-free rate, market risk premium and project return are assumptions you can change.
  • Rounding: figures loaded into the boxes are rounded to the decimals shown, and every calculation uses exactly those numbers.

What if the company borrowed more?

For this company

Illustrative model: the curve passes through the company’s numbers today. Cost of equity rises with debt (Modigliani–Miller with taxes); lenders are assumed to start charging more once debt passes about 30% of funding.